Published on June 4th, 2019 | by Kyle Field0
Tesla Refocuses On Financial Stability & Manufacturing Throughput In Q2
June 4th, 2019 by Kyle Field
Tesla CEO Elon Musk went on the Ride The Lightning podcast with Tesla enthusiast and IGN Executive Editor Ryan McCaffrey for an hour-long interview. Topics ranged from the Tesla Pickup Truck to the Model Y and even delved into the possibility of a Tesla App store in the future.
In his talk with McCaffrey, Musk unpacked the top priorities for Tesla over the next few months. In between comments about the exciting new projects the company has in the works, he spoke about a renewed push within the company to stabilize the throughput from its automotive manufacturing lines. Stable manufacturing throughput and reliability is the constant carrot that any manufacturing company chases. That holds doubly true for a market-defining company like Tesla that brings in most of its revenue from automotive sales.
1 — Fiscal Responsibility
“Our primary focus right now is just making sure that Tesla is in good financial condition,” Musk said. The admission that financial stability is the top priority for Tesla harkens back to Musk’s bold statements last year that the company would achieve sustained quarterly profitability starting in the third quarter of 2018. It was indeed profitable for Q3 and again in Q4, but the company lost its footing in the first quarter of 2019. Scaling up its automotive delivery wave for shipping the Model 3 into Europe and China in the same quarter as a $920 million bond repayment was due pushed the company back into the red when the cards were put down.
At the start of the second quarter, the company sought and found a fresh breath of financial air in the form of a $2.3 billion capital raise. Following the raise, Musk sent out an email to employees, that was later leaked, cautioning staff members to maintain their financial vigilance after the new injection of cash. The letter was inaccurately interpreted by the mainstream media as a statement about the inevitability of bankruptcy, but in reality, it was just a reminder to Tesla employees about the fundamentals of business. Our very own Zachary Shahan summed up the meme lord’s email like this:
“Hey, people of Tesla, I know you saw that we just raised a couple billion dollars, but don’t get complacent. Don’t take that to mean that you can throw money around carelessly. We still need to vigilantly look for ways to cut costs and become a more efficient company.”
There was no mincing of words in Elon’s email, but somehow the mainstream media managed to spin it inaccurately, further exposing their ill will towards Tesla. Zach’s interpretation of the emails was confirmed by a tweet from Elon shortly after publication that, as you can see, was one of his shortest.
2 — Stable Production
Stabilizing production is sometimes an afterthought in a company focused on continuous improvement, but it came up as one of the top priorities for Musk. Why? Because the Tesla Model 3 production lines are proverbial airplanes built while flying. Tesla pulled out all the stops to get Model 3 production running in 2017–2018 and rallied the troops yet again to ramp production up to a rate of 5,000 vehicles per week. (Tesla President of Automotive Jerome Guillen spoke with CleanTechnica about that in March of this year.)
Today, production is consistently above 5,000 vehicles per week, but the frenetic pace of the last 2 years has left little time to pause for reflection.
Musk and Team Tesla are pausing and taking in a deep breath while stabilizing the production lines in Fremont before again scaling up Model 3 production at Gigafactory 3 in Shanghai, China, later this year. Immediately after that, the team will do it all over again by standing up Model Y production lines at the Fremont factory or Gigafactory 1 (more on that later) and at Gigafactory 3 in parallel.
The more polished and tuned Fremont’s Model 3 production lines are before Gigafactory 3 gets its equipment bolted in, the better, and that holds doubly true for Model Y. Each improvement that can be made now saves 3 times more pain down the line. In business speak, that translates to cash. It’s cheaper to fix it now than it will be to have to fix it 4 times if an issue is found next year. It’s just good business to pause to sand off any rough edges now, and that’s exactly what Musk and team are doing.
3 — Deliver An Experience
As difficult as it may be, it was not stable throughput that sunk Tesla’s aspirations of profitability in Q1. Converting all those vehicles into cash only happens when the cars make it into the hands of customers. Musk told McCaffrey that Tesla was intent on ironing out the kinks in its delivery process in order to get beyond such challenges.
This is clearly a statement about Tesla’s latest beachhead markets in the EU and Asia. Establishing and improving its delivery process will continue to be a focus for the company as it adds Model 3 distribution to new countries on a regular basis. Tesla had a fine delivery process set up for its Model S and X around the world, but the Model 3 is a different beast altogether. For one thing, in the EU, the Model 3 is being shipping into the continent fully assembled, which is not the case with the S & X.
Equally impactful, the Model 3 is the first of a handful of high-volume vehicles from Tesla, and that put new strains on North American delivery teams last year as they worked through the growing pains of delivery hell.
(Editor’s side note: Tesla is not the only company affected. I spoke today with someone who owns a vehicle delivery company in the US and he noted that the cost of shipping a car from California has gone up approximately 50% due to Tesla, which has gobbled up vehicle delivery capacity and even some vehicle delivery companies.)
4 — Increasing Manufacturing Efficiency
Continuous improvement is in the blood of Tesla. It is what spurred the team to build an electric car that wasn’t simply as good as combustion vehicles, but one that represented a step change improvement. This desire to constantly improve the product in ways that are lower cost, better for customers, more efficient, more comfortable, or faster translate to vehicles without real model years.
On the manufacturing efficiency side of things, Tesla continues to push the envelope. Musk shared one dramatic example of this as it relates to the rear frame of the Model 3. The current manufacturing process requires a mix of 70 aluminum and steel parts being pieced together into the rear frame for the Model 3. Tesla is swapping all of these parts out for a cast part from a small casting machine that will allow the company to initially go down to just 4 parts. Tesla is already looking at a larger casting machine that would allow it to consolidate this down to just one part.
Not only does that simplify the number of parts in the car and the number of places a failure can occur, but it drastically simplifies the manufacturing process. Eliminating the need to assemble and move around 70 parts means eliminating a small army of robots from Tesla’s body shop. Fewer robots translates into less capital expenditure to install a new production line (I’m looking at you, Gigafactory 3). Each of those robots also requires a team of maintenance personnel, downtime, etc. This is a huge improvement and one of many that Tesla is making to improve the efficiency of its manufacturing lines.
The plan for Model Y is to leverage as much of the Model 3 as possible. Early figures had the Model Y sharing 76% of its parts with the Model 3. Elon told Ryan on the podcast that, “we’ve tried to make the car as similar to the 3 as possible except to the degree that a change is necessary to achieve SUV functionality.” This shared DNA also means that Tesla gets to rethink its manufacturing process for the Y, with the added benefit of being able to test and benefit from improvements on the Model 3 lines.
5 — Success In Shanghai
Construction at Tesla’s Gigafactory 3 in Shanghai, China, continues to astound its global audience. The might of Chinese industry is being showcased on the global stage. The factory has gone from a muddy lot to a fully established building, with plans to start churning out cars in fewer than 12 months from the start of construction. GF3 will be the first factory outside of North America for Tesla and will use Chinese-sourced batteries for the first time. Musk told McCaffrey that, “staying on track with the Shanghai Gigafactory” was one of his top priorities for Tesla in the near term.
Delivering on the early goals for Gigafactory 3 is one more way to prove to the world and to investors that Tesla can scale and that Tesla can compete in manufacturing and sales in the world’s largest private vehicle market. Gigafactory 3 will leverage Tesla’s learnings from the ramp up of the Model 3 to improve its production there.
Tesla is heading into uncharted waters with Gigafactory 3, which is the first wholly-owned foreign automobile factory in China, ever. It won’t have the support of corporate just a few hours away or an army of 10,000 coworkers at Fremont, so the challenge is very real, but so is the benefit if Tesla can pull it off. Building cars in China could allow it to tap into incentives from the Chinese government for plug-in vehicles, tapering off as they may be.
6 — Model Y
Looking beyond the stabilization of manufacturing, delivery, and new markets for the Model 3, we have the Y. The Model Y is expected to enjoy a larger market than the Model 3 and Elon and team are gearing up for the launch next year. Musk told McCaffrey that the longest lead time items for the Model Y are the stamping dies for the exterior body panels, so those were the highest priority items to get nailed down.
McCaffrey leaned into Musk about where the Model Y will be manufactured and Musk shared that either Tesla’s Fremont auto factory or Gigafactory 1 in Sparks, Nevada, would work well. Fremont has the benefit of having all of the existing automotive equipment on site and would allow Tesla to share common manufacturing lines with Model 3 up to a point. At Gigafactory, Tesla would avoid having to ship battery packs, chargers, and drive units from Nevada to California, Tesla has copious amounts of land to expand into, and Nevada has a lower cost of living. With all of that noted, Musk did share that his team convinced him that even with its capacity constraints, Fremont likely made the most sense and was the default plan at present.
For more details from the Ride The Lightning podcast in which Ryan McCaffrey interviewed Elon Musk, check out the video version below or pull it up on your favorite podcasting app.
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